Once you’ve paid off your debts (or at least paid off the main debts), the next step to becoming wealthy is to start saving. In this post, I’m going to show you how to start saving money.
We all know that saving is important, but most people don’t place as much importance on it as they should.
I believe the reason for that is that it’s just not exciting. Added to that is that we are told so many different amounts of money that we should be saving that it can be confusing.
Are you supposed to save 10% of your income, 20%, more, less?
I’ll answer that question in a moment, but first, let me give you one tip that I think will help with your savings goals.
Always be Saving for Something
I often find people who say they can’t save money, are usually those that don’t have a reason to save. They aren’t motivated to do so.
But if you find a reason to save, whether it’s for something big or something small, you’ll be more likely to want to put that money away rather than spend it at the moment.
It’s why it’s easier to save when you’re planning a holiday or a wedding because that goal becomes your motivation to do so. It excites you.
When it comes to saving money, you always want to have at least one thing that you’re aiming for.
Always be saving
It could be a house deposit, or a European holiday, or perhaps a new car. And you need to know how much that goals costs in real terms so you know how you’re progressing towards it.
What motivates you to save will be different to what motivates others. Everybody has different things that motivate them. So whatever you choose has to be something that makes you want to stick to your savings plan.
For me, security is my number one motivation. I save money on the small things so that I can secure money and an income for myself and my family over the long term. I do that by investing in the stock market (which I’ll go into later). But that’s my thing. Your motivation for saving is likely to differ.
My goals are what make me want to save rather than spend. And your goal should make you want to do the same. It should be motivating enough so that when you are tempted to buy something you don’t really need that you’re strong enough to say enough. You want the big thing more than this small item right now.
How Much Money Should You Be Saving?
Now that you have that special thing that makes you want to save, it’s time to work out how much money that you should allocate to your savings plan.
Right up front, I’m going to tell you that there isn’t a magic standard percentage or amount that fits everyone.
I know you’ve heard that you should be saving 20% of your income or another standard figure, and I’ll admit that it’s an easy answer to give people when they ask. Many people want a concrete answer and twenty percent allows the amount to vary according to how much income is coming in. It sounds reasonable.
I’ll even admit that in my early financial advice days I recommended a percentage of income too.
But the problem with one-size-fits-all answers is that it doesn’t take into account the differences in people’s lives and circumstances. Twenty percent is likely too much for someone who is the sole carer of a one or more family members, or it might be too little for a single person living at home with no expenses.
Saving money should empower people financially, not make them feel they aren’t doing it the ‘right’ way.
The amount you should save needs to come back to your unique situation and the only true way to figure out how much you can afford to save is to have a budget.
Yep, the boring old budget again. Like before, it’s going to let you know how much money you have available to save.
That amount should be the money you have left over in excess. If you’ve allocated all your bills and necessities (and given yourself fun spending money), whatever is left over should go into your savings account.
My advice: Save as much money as you are able. You’ll reach your financial goals much sooner.
Where to put your savings money
Okay, so I’ve convinced you to save as much as is right for you. Great, but now where are you going to put your money?
You need to find a high interest savings account that is separate from your everyday transaction account.
That’s all you need. Two accounts. One for your day-to-day expenses that is easy to access, and one that you’re going to put your savings into. Keep it simple.
When choosing a savings account the main things to look for are:
- the interest rate,
- whether the account has any fees associated with it,
- how easy it is to deposit and withdraw your money, and
- if it can be linked to your everyday transaction account.
Interest rates
Generally, online only savings accounts have the highest yields (interest rates).
Many of them offer two tiers of interest. A standard rate for having money in the account, and a bonus rate. The bonus rate is extra interest on top of the standard rate that you get for meeting certain criteria. Usually that criteria is depositing a set amount of money into the account every month.
Right now, in Australia, the average standard rate for online savings accounts is 2% p.a. up to 3% if you include bonus rates.
Most of the major banks have online accounts, but you’ll find the smaller banks such as ING Direct, Citibank, RAMS, and HSBC will have slightly higher interest rates because they want to attract your business.
Fees
It’s rare for any of the online accounts to have monthly or yearly fees (but do check the fine print).
The most common fees associated with these accounts is a charge to withdraw your money from an ATM or over the counter at the bank itself. Not all of them have this but it’s worth being aware of it.
Other fee’s you need to be aware of is if they charge for having less than a minimum amount in the account. Again, not many of them have this, but it’s worth finding out.
Ease of deposit and withdrawal
You need to be able to easily add money and withdraw as you please. That might be by linking it to your everyday bank account or having convenient access to an ATM or branch (without fees for doing so, as mentioned above).
You will more likely want to save if it’s easy to do so.
Linking to your transaction account
I like savings accounts that are linked to my everyday transaction account so that I can quickly transfer funds between the accounts. You can do that with most online accounts, even if the account isn’t with the same bank.
There are generally no fees associated with this and it’s just a matter of logging into your savings account (either online or through the bank’s phone app) and entering the amount you want to transfer.
You can also set up recurring deposits and see your growing balance (and growing interest deposits) which can be incredibly motivating.
So that’s it.
Decide whether you prefer the convenience factor of using your regular bank’s online savings account against another bank for the higher interest rate. Decide what is more important to you, open that account, and start saving.
What about a savings account that has lots of different sub-accounts?
There is a trend right now where you can split your main savings account up into lots of different ‘sub’ accounts. The idea is that you can place different amounts of money into each slice that you’ve allocated to different saving goals.
So one sub-account might be for saving for a car, another for a holiday, another for Christmas, and so on. The idea is that you can focus on saving for every single thing on your wish-list.
While having such options sounds great in theory, I’m not sure it works out so well in practice. In my experience, the more accounts that you have, the less you can achieve all those individual goals because you are diluting your savings power.
The motivation that you’ll reach one of your goals becomes smaller because it takes all that much longer to reach one of them. You’ve split the pie too much.
I’m not saying that you can’t have more than one goal for your savings, everyone always has more than one thing they want in life. But having multiple accounts complicates the goal of saving as easily and effortlessly as possible.
Have one account and save for what you want one thing at a time. You’ll achieve those goals much faster and be able to move onto the next item on your list while enjoying the first thing. Now that’s motivating.
Look for a savings account that will give you the best return possible. Not that it can slice up your savings into ten different sub-accounts.
What about Term Deposits or Bonds instead of a Savings Account?
Term deposits and government bonds are very popular with people not comfortable with investing, and with good reason, it’s a guaranteed return on your money. There is little risk.
The idea is that you lock away your money for a predetermined period and at the end of that term you get back your money, with interest.
Right now, the interest rates for term deposits and government bonds is around 2.5% p.a.
As you can see, that’s not a lot different to the interest rate for most online savings accounts. Perhaps half a percent higher.
I don’t believe that half a percent is worth having your money tied up and inaccessible for six, twelve, or even sixty months.
Keep your money in a savings account that offers a similar interest rate and that you can access at any time. It’s simpler to set up and offers the same security. Term deposits and bonds might be safe, but they’re not as convenient.
The very first thing you should save for – your Emergency Fund
To start your savings journey off on the right foot, the very first thing that you should save for is your emergency fund. Your emergency fund is a set amount of money that you’ve put aside to deal with any financial emergencies that might crop up.
It’s so you can use that saved cash instead of having to use your credit card. Sort of like creating your own insurance for what you might need to purchase in a hurry.
How much do you need in your emergency fund?
There is a lot of debate on how much you actually need in your emergency fund. Most people overestimate what they’ll actually need.
A good amount to aim for is between $500 and $2000. Small enough to not be intimidating, and large enough to cover most minor emergencies.
Generally, the emergency fund is to pay for things like a new washing machine if your old one breaks, or minor car repairs. Things like that.
It’s not for creating a year’s worth of income in case you lose your job. Get insurance for that. It’s just for the smaller emergencies, the ones you would have likely put on your credit card to pay for.
It doesn’t matter which account you put your emergency fund into. Put it in either your regular account or your savings account. It’s up to you. The only importance here is that you can access the money quickly if you need it.
Once you’ve got your emergency fund set up, you can start to save for the bigger, more exciting things.
So the basics for your savings account are set up.
The next step is to start the actual saving. In my next post, I’m going to cover all my tips and tricks for putting your savings into hyperdrive and building up that account as fast as possible.
It’ll be coming soon.
From the author
Did you find this article useful? It’s actually part of the first draft of a general finance book I’m writing. I’ve decided to blog the book (that is, write the first draft of the entire book on this blog as I go.)
The blog posts might not be in order as I skip around different sections of the book, and not everything I write may end up in print. However, it’s a good strong base for what you’ll find inside.
That means you can watch me write it, and even read the book for free (a few thousand words at a time) if you like.
Or if you want to get notified when I publish it, you can sign up to my email list below (I’m only sending out emails once the book is done and I don’t know how long that will be).
Until the next post, happy reading.
Tracey 🙂
[mailerlite_form form_id=1]
